{"id":30240,"date":"2024-10-09T10:38:34","date_gmt":"2024-10-09T15:38:34","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&p=30240"},"modified":"2025-08-20T18:52:49","modified_gmt":"2025-08-20T23:52:49","slug":"valuation-multiples","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/valuation\/valuation-multiples\/","title":{"rendered":"Valuation Multiples: Full Tutorial, Example Calculations, and Interpretation"},"content":{"rendered":"

Valuation Multiples Definition:<\/strong> A valuation multiple equals a company\u2019s Equity Value (Market Cap) or Enterprise Value divided by a financial or operational metric, such as Revenue, EBITDA, or Monthly Active Users; valuation multiples tell you how cheap or expensive a company is in relation to similar companies.<\/p><\/blockquote>\n

The easiest real-life analogy here is to real estate<\/strong>.<\/p>\n

Suppose that you\u2019re thinking about buying two homes: One that costs $200K and one that costs $500K.<\/p>\n

If both homes are the same size, such as 3,000 square feet, and they\u2019re similar in all other respects, this is easy: The $500K one is more expensive.<\/p>\n

\"Valuation<\/p>\n

On a per-square-foot basis, the $500K house is $167 per square foot, and the $200K house is $67 per square foot.<\/p>\n

But now consider what happens if the houses are very different sizes:<\/p>\n

\"Valuation<\/p>\n

The $500K house is still \u201ca higher price,\u201d but it is only $100 per square foot, while the $200K house is $200 per square foot.<\/p>\n

So, you get more for your money<\/strong> with the $500K house.<\/p>\n

Valuation multiples do the same thing but for companies rather than homes.<\/strong><\/p>\n

For example, if Software-as-a-Service (SaaS) Company A has an Enterprise Value of $800 million (what its core business is worth) and SaaS Company B has an Enterprise Value of $500 million, Company A might seem more expensive.<\/p>\n

But now let\u2019s say that Company A has Revenue of $200 million, while Company B has Revenue of $75 million.<\/p>\n

Company A\u2019s revenue multiple<\/strong> \u2013 a valuation multiple based on Enterprise Value \/ Revenue \u2013 is 4x, while Company B\u2019s is 6.7x.<\/p>\n

Therefore, you pay more for each $1.00 of sales<\/em> if you invest in Company B.<\/p>\n

Is this higher multiple justified?<\/p>\n

We can\u2019t tell without knowing more about both companies.<\/p>\n

People get valuation multiples wrong because they often stop here and say, \u201cCompany B is expensive!\u201d or \u201cCompany A is cheap!\u201d without understanding why.<\/strong><\/p>\n

We need to look at each company\u2019s growth rate, margin, cash flow, SaaS metrics<\/a> (ARR<\/a>, ARPU<\/a>, Rule of 40<\/a>), markets, competition, and other qualitative attributes to say anything substantive.<\/p>\n

Files & Resources:<\/strong><\/h3>\n